Understanding the self-employed health insurance deduction can be challenging. Below, you will find answers to your questions about this IRS tax benefit. 

A self-employed individual (or a partner or a more-than-2%-shareholder of an S corporation) can deduct as an above the-line expense 100% of the amount paid during the tax year for medical insurance on behalf of the taxpayer, spouse, dependents, and children under age 27 even if the child is not a dependent (Code Sec. 162(l)(1)(D)). For the taxpayer to be eligible for the deduction, one of the following statements must be true:

Schedule C or F - The taxpayer was self-employed and had a net profit for the year reported on Schedule C (Form 1040) or Schedule F (Form 1040). The deduction cannot exceed the individual’s net earnings from selfemployment derived from the trade or business for which the plan providing the coverage is established. Net earnings are the net profit from Schedule C or F reduced by the 50% of SE tax deduction (1040 Schedule 1, line 15) and/or the contributions to the taxpayer’s qualified retirement plan, SEP or SIMPLE plan (1040 Schedule 1, line 16) (Form 1040, Schedule 1, instructions worksheet). The health care policy can be either in the name of the business or in the name of the taxpayer.

S Corporation Shareholder - If the taxpayer is a more-than-2% S corporation shareholder, and the shareholder's wages (i.e., the Medicare wages from box 5 of Form W-2) from the S corporation are treated as his earned income, and the premiums paid or reimbursed by the S corporation are shown as wages on Form W-2. The policy can be either in the name of the S corporation or in the name of the shareholder.

Partner - The taxpayer is a partner with net earnings from self-employment for the year reported on Schedule K-1 (2021 Form 1065), box 14, code A. The policy can be in the name of the partnership or in the name of the partner.

No deduction is available for any month in which the self-employed individual is eligible to participate in a “subsidized” health plan maintained by an employer of the taxpayer, the taxpayer's spouse, or any dependent, or any child of the taxpayer who hasn't attained age 27 as of the end of the tax year. This rule is applied separately to:

Thus, an individual eligible for employer-subsidized health insurance may still be able to deduct long-term care insurance premiums, so long as he isn't eligible for employer-subsidized long-term care insurance.

Important Definition - The term “subsidized” means at least 50% of the cost of the coverage is paid by the employer (IRC Sec 35(f)(1)). Thus, if the taxpayer were only covered for one month under the employer’s subsidized plan, the SE health insurance deduction is still available for the other 11 months of the year. A former employer generally does not pay part of continuation or COBRA medical insurance premiums, so unless the employer picks up 50% or more of the cost, the COBRA premiums of a self-employed individual will be eligible for the SE health insurance deduction, if other requirements are met.

No Double Dipping - The health insurance premiums claimed as an above-the-line SE health insurance expense cannot also be claimed as a Schedule A medical expense.

Qualifying Insurance - When adding the amounts that qualify as insurance premiums for either the self-employed health insurance deduction or the Schedule A deduction, don’t overlook:

If the taxpayer is self-employed and the premiums cannot be used for the above-the-line self-employed health insurance deduction because of the net SE earnings limitation, the excess can be taken as a Schedule A deduction.

Medical expenses paid by an HRA or FSA are not deductible health insurance premiums because they are paid for by pre-tax dollars. The same goes for medical expenses paid for or reimbursed by an HSA.

A Chief Counsel Advice (CCA 201228037, July 16, 2012) addresses the question of whether Medicare premiums can be deducted under IRC Sec 162(l) for the coverage of a self-employed individual's spouse. The answer: YES. The Counsel’s analysis of the law is as follows (emphasis added):

So, in addition to stating that a spouse’s Medicare premiums are eligible for the SE health insurance deduction (if all other requirements are met), the CCA also clarifies that all Medicare premiums (B, C and D) are eligible.

Medical insurance premiums paid for a self-employed individual’s child who is under the age of 27 as of the end of the year can be covered under the SE individual’s plan and deducted as part of the self employed individual’s health insurance deduction. (Notice 2010-38) The definition of “child” for this purpose includes:

The child does not have to qualify as a dependent. No other requirements apply so long as the individual meets the definition of a child and has not reached age 27 by the last day of the year. Even a married child is included by this definition! (But the married child’s spouse and/or children are not covered.) A child attains age 27 on the 27th anniversary of the date the child was born (for example, a child born on April 10, 1995 attained age 27 on April 10, 2022).

If the self-employed individual utilizes a group policy provided by an association, be aware that although group policies offered by insurers are also required to cover older children, they are only required for children under the age of 26.

The SE health insurance deduction is normally a straightforward above-the-line deduction that is based upon qualified health insurance premiums paid by a self-employed individual and limited to the profit from the business less one-half of the SE tax paid (i.e., the 50% of SE tax deduction that reduces gross income).

However, complexity arises when computing the deduction of SE taxpayers who purchased their insurance through a government exchange (marketplace), since, for the deduction, the insurance premiums paid must be reduced by the premium assistance credit received, and the credit received is based upon the taxpayer’s MAGI. Thus, the credit and MAGI are interdependent upon one another. The IRS solution to the problem is to recalculate the credit and MAGI over and over again until the difference is within $1 (Rev Proc 2014-41). The Rev Proc also provides an alternative calculation. Either way it produces a complicated calculation that is best left up to your software.

A self-employed individual qualifying for the deduction includes a general partner or a limited partner receiving guaranteed payments (Rev Rul 91-26, 1991-1 CB 184).

The deduction is not taken on Schedule C since the medical expense cannot offset SE taxes. Instead, it is taken as an adjustment to gross income.

100% of medical insurance premiums paid.

No deduction is allowed for self-employed individuals to the extent that the deduction exceeds the individual's net earnings from self-employment (Code Sec. 401(c)) derived from the trade or business with respect to which the plan providing the medical care coverage was established. Does this mean that a health insurance policy purchased by a sole proprietor must be issued in the name of the trade or business? No, according to the IRS’ Chief Counsel’s Office, the policy may be in the individual’s name. However, the sole proprietor may not net the earnings of multiple businesses for the net income limitation unless separate policies are involved. For example, if the self-employed individual purchases a medical plan under Business #1 and a dental plan under Business #2, the earned income from each business may be considered together. (CCM 200524001)

As part of the Affordable Care Act, an additional 0.9% Medicare tax applies to combined wage and self-employment income in excess of $200,000. For married taxpayers, the threshold is instead $250,000 for taxpayers filing jointly and $125,000 for taxpayers filing separately.